Question

ETHICAL DILEMMA

The management of the Auto Parts Division of the Santana Corporation receives a bonus if the division's income achieves a specific target. For 2013 the target will be achieved by a wide margin. Mary Beth Williams, the controller of the division, has been asked by Philip Stanton, the head of the division's management team, to try to reduce this year's income and "bank" some of the profits for future years. Mary Beth suggests that the division's bad debt expense as a percentage of net credit sales for 2013 be increased from 3% to 5%. She believes that 3% is the more accurate estimate but knows that both the corporation's internal auditors as well as the external auditors allow some flexibility when estimates are involved.

Presented below is a sequence of steps that provide a framework for analyzing ethical issues. These steps can help you apply your own sense of right and wrong to ethical dilemmas.

Step 1: Determine the facts of the situation. This involves determining the who, what, where, when, and how.

Step 2: Identify the ethical issue and the stakeholders. Stakeholders may include shareholders, creditors, management, employees, and the community.

Step 3: Identify the values related to the situation. For example, in some situations confidentiality may be an important value that may conflict with the right to know.

Step 4: Specify the alternative courses of action.

Step 5: Evaluate the courses of action specified in step 4 in terms of their consistency with the values identified in step 3. This step may or may not lead to a suggested course of action.

Step 6: Identify the consequences of each possible course of action. If step 5 does not provide a course of action, assess the consequences of each possible course of action for all of the stakeholders involved.

Step 7: Make your decision and take any indicated action.

Answer 1

Step 1: The facts of the situation – Managers at the organization receive their bonus which is conditional to the divisions achieving a pre set target. For the current year the target has been achieved and that too by a wide margin. This situation has led the controller - Mary Beth Williams - to suggest that they increase the bad debt estimates from 3% to 5%. This will help them to defer income to future periods and guarantee fat bonuses in future as well.

Step 2: The ethical issue at hand here is the question if the obligation of the controller towards the other managers to ensure fat bonuses for them is greater than the obligation to provide true, correct and accurate financial information that is in no way misleading in nature.

The stakeholders are Mary Beth Williams, controller, Philip Stanton, head of the management team, other division managers, the top management of Santana Corporation, internal and external auditors, current and future creditors, and current and future investors.

Step 3: The values that are related to the situation are values and moral principles like integrity, honesty and loyalty to the company and management.

Step 4: There are two main alternatives here. The first alternative is to follow the suggestion of Philip Stanton to defer some 2013 income to future years. The second alternative is to refuse to defer profit to the future and record the 2013 bad debt expense at the best estimate of 3% of net credit sales and report about Stanton’s request to top-level management.

Step 5: The first alternative demonstrates loyalty to the management team. The second alternative demonstrates loyalty to the company as a whole and also incorporates the values of competence, honesty, integrity, objectivity, and responsibility to users of the financial statements.

Step 6: For first alternative the possible consequence is that the controller would please the management team who would probably receive bonuses in future years. It could also backfire and if the manipulation is found about the controller will most likely lose the job and be fired.

For the second alternative the consequence is that the users of financial statements would receive a more relevant and reliable estimate of net income for 2013 and future years. Net income and bonuses in future years would be fairly stated.

Step 7: The action that I will take will be the second alternative. I will refuse to defer profit to the future and record the 2013 bad debt expense at the best estimate of 3% of net credit sales and report about Stanton’s request to top-level management.

This is the ethical and right way of doing things in this particular situation and will ensure that interests of all stakeholders are not compromised with.